Investors Anxious Amid Renewed Shutdown Risk

On Tuesday, October 3, the US House voted to oust California Republican House Speaker Kevin MacCarthy just days after architecturing and passing a legislative bill to avert an imminent government shutdown. McCarthy's booting is the first in the US Congressional history and has raised enough market concerns as it's expected to slow down government funding past the November 17th deadline.

The surprising event amid the Speaker's term was seen as affecting government bonds, according to several strategists, and in return, US equity indices. Investor nervousness also owed to hawkish Fed speak, and better-than-expected JOLTS data saw stock losses accelerate on Tuesday. The S&P 500 (USA 500) slid 1.4%, the Dow Jones (USA 30) recorded a drop of about 1.3%, and the tech-heavy Nasdaq (US-TECH 100) plunged the most, down 1.67%. 

What Happened in the Chamber

In a motion introduced by far-right Rep. Matt Gaetz, the House of Representatives voted to remove Kevin McCarthy as Speaker in a no-confidence vote (216-210) on Tuesday, with a small group of conservative Republicans joining Democrats in support. Gaetz has threatened McCarthy with a motion since their collaboration with Democrats on a debt ceiling deal back in the spring of this year. 

It is said that it was triggered by McCarty’s success in getting Democrats to support the short-term funding bill that averted an imminent government shutdown over the weekend.

Interestingly, the historic ousting comes days after US President Joe Biden called for more assistance for Ukraine and stated he expected the now-former Speaker to secure more aid. The Democrat-controlled Senate plans to take up legislation to ensure continued support for Ukraine. (Source:The Guardian)

How Could the Ousting Affect Markets

Dysfunction in Congress is a major factor behind bond market instability, with McCarthy's removal increasing the fears of a government shutdown in mid-November when stopgap funding will run out. 

While history shows that the previous shutdowns have not significantly impacted the stock market, by looking at the most recent shutdown in 2019, one can see its magnitude. It delayed more than $18B in spending, resulting in $11B in costs (at that time) and a loss of $3B. Current estimates see a shutdown surpassing $1B costs per week.

Moreover, if there is a shutdown, it could amplify credit risk and hurt consumer confidence, with a lack of data that typically serves as the basis for monetary policy decisions potentially forcing the Fed to hold rates unchanged until the data come in. Between now and the next FOMC meeting on November 1, the Fed will analyse the September Consumer Price Index (CPI) report and jobs report due on Friday, October 6, with any delay likely to cause anxiety among investors and contribute to volatility.

In addition, investors agonise over many things in the current environment, from out-of-control spending, the inability to govern, and the constant threat of rising yields to worries over the debt ceiling. Other market factors include higher interest rates, looming student loan payments, the United Auto Workers (UAW) strikes, and rising oil prices. 

Next Steps for the US House

Speaker Pro Tempore Patrick McHenry, who is running the House temporarily, has closed the chamber to allow time for colleagues to find a new leader. For the new Speaker to be elected, a majority vote is required, with Republicans currently holding a narrow majority, presenting challenges in passing meaningful legislation. As a result, McCarthy's successor will need to garner support from some of the individuals who voted against him, thereby appealing to the rebels within the party.

Representative Tim Burchett of Tennessee believes there are plenty of people who can step up. Possible contenders for the top job include Reps. Steve Scalise, Tom Emmer, Elise Stefanik, Tom Cole, Jim Jordan, Byron Donalds, Patrick McHenry, Hakeem Jeffries and Donald Trump. 

Republican candidates will present their pitches on the 10th, next Tuesday, with a vote expected the following Wednesday. However, given the context, settling on a new speaker could drag out longer than markets would like.

Conclusion

Apart from weighing on markets on Tuesday, the ousting of House Speaker Kevin McCarthy has raised the potential for a government shutdown in November, with uncertainty from data delays likely to force the Fed to hold interest rates unchanged. The House is currently finding a new speaker, which could further prolong market uncertainty, where traders may want to exercise caution amidst the volatile environment and closely monitor developments in Congress.